With the coming into force of the new obligations under Bill 16,[1] expectations placed on boards of directors have increased.
Between the maintenance log, contingency fund study (assessment), new documentation obligations and building maintenance requirements, the issue of directors’ liability has never been more relevant.
Yet many directors may be tempted to believe that, due to the often voluntary nature of their role, they are protected from any personal liability.
Although directors are not expected to be perfect, they nevertheless have legal obligations that must be met and, in certain circumstances, failure to comply with them may result in personal liability.
Directors’ Obligations
A syndicate of co-owners is the legal entity representing the co-owners in a Québec divided co-ownership and is administered by a board of directors. Accordingly, directors act as the syndicate’s agents and must perform their duties in accordance with the obligations imposed under the Civil Code of Québec,[2] which include:
- acting with prudence
- acting with diligence
- acting with honesty
- acting in the interest of the co-owners
The fact that a director serves on a voluntary basis does not exempt that person from complying with these obligations.
However, directors owe the syndicate and co-owners an obligation of means. As a result, the courts generally recognize that a director is not bound to make the best possible decision.[3] On the other hand, directors must make a decision using all reasonable means at their disposal, without having to guarantee the ultimate outcome.[4]
In other words, directors will rarely be criticized for an error in judgment made in good faith; however, they could be if, for example, they ignored a known problem or failed to adequately inform themselves before acting.[5]
The Enactment of Bill 16
Condominium law reforms[6] have significantly increased the practical responsibilities of syndicate boards of directors. Where some practices once relied on experience, goodwill or, at times, informal methods, the legislature has now introduced a much stricter framework.
In particular, syndicates are now required to:
- keep a maintenance log
- obtain a contingency fund study prepared by a qualified professional
- ensure more rigorous document management
- provide a certificate confirming the condition of the co-ownership when a fraction is being sold
These requirements have a clear objective: to put an end to the ad hoc management approach that has long characterized some co-ownerships while promoting preventive management.
Accordingly, directors can no longer simply react to problems as they arise. They must now adopt a proactive approach and ensure that both the syndicate’s legal obligations are met and the management tools required by law are implemented.
When Inaction Gives Rise to Liability
In co-ownership matters, liability often arises less from making a bad decision than from failing to make any decision at all.
Consider the example of a syndicate that receives several reports of recurring water infiltration in the building. If the board of directors decides to do nothing for several years in order to avoid imposing a special assessment on the co-owners, it is highly likely that the damage will worsen.
The issue will no longer be the infiltration itself, but rather the fact that the board was aware of the problem and nevertheless chose not to intervene in a timely manner.
The same reasoning could apply to a number of situations, such as the poor condition of a roof, structural problems or dangerous balconies.
In any situation of this kind, the directors must be able to demonstrate that they took the reasonable steps required.[7]
Risks Related to Contingency Funds
The management of a contingency fund will likely be among the most sensitive issues that directors will face over the coming years.
Over the years, many boards of directors have preferred to keep common expenses low to avoid co-owner discontent. The outcome is now well known: aging buildings require major work, but the available funds are far from adequate.
A contingency fund study will often reveal that the contributions collected over the years fall well short of what is actually required to meet the building’s anticipated needs.
As a result, directors may find themselves facing difficult questions:
- Did they disregard professional recommendations?
- Did they refuse to increase contributions despite repeated warnings?
- Did they prioritize political considerations at the expense of the co-owners’ interests?
Of course, each situation must be analyzed on the basis of its particular circumstances. However, as these obligations become increasingly well known and documented, it will be more difficult to justify inaction.
Liability Insurance Is Not a Panacea
Since April 15, 2021, syndicates of co-owners must maintain liability insurance coverage for their directors.[8]
This protection is clearly an important risk management tool. However, it should not be seen as providing complete immunity.
Like any insurance policy, it is subject to limits, conditions and certain exclusions, including those involving fraud or bad faith.
Accordingly, directors cannot assume that every claim made against them will automatically be covered by the syndicate’s insurer.
For this reason, board members are advised to familiarize themselves with the syndicate’s insurance policy and regularly review the extent of the coverage. A good understanding of the coverage and its limitations is crucial to prudent and diligent governance.
How to Reduce Risk
Directors can best protect themselves against liability not by relying on insurance or avoiding mistakes, but by adopting a rigorous, proactive and well-documented approach to governance.
More specifically, syndicate boards of directors should, among other things:
- record their decisions in the minutes
- retain expert reports
- obtain professional advice when necessary
- act promptly when a problem is identified
- implement the requirements under Bill 16 well before the applicable deadline
- adopt a long-term approach to maintaining the building
Conclusion
Although directors of syndicates of co-owners are not held to a standard of perfection in managing the building, they are not automatically immune from liability simply because they serve on a volunteer basis.
As the requirements imposed on syndicates increase, so do the expectations placed on their directors. However, this does not mean that every management error automatically exposes directors to a lawsuit.
The directors who are best protected are not necessarily those who avoid all mistakes, but rather those who ensure that they are properly informed, document their decisions, and act proactively in the best interests of the syndicate.
Our team is available to further discuss your obligations as a director and to support you in implementing the new legal requirements that now apply to syndicates of co-owners.
